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What is impermanent loss?
Impermanent loss is the shortfall a liquidity provider can face when the prices of the two pooled tokens drift apart. The pool rebalances automatically, so the provider ends up holding more of the token that fell and less of the one that rose, worth less than holding both outright.
What it means for you
The loss becomes permanent the moment you withdraw while prices are still apart. Uniswap's documentation shows a price doubling costs about 5.7% against simply holding, and a halving costs the same. Compare that with the fees the pool actually earns before depositing.
A common mistake: “Impermanent loss doesn't matter because it goes away on its own.”
In fact: It disappears only if the two prices return to their starting ratio. Withdraw while they are apart and the shortfall against holding is locked in, and the fees earned may be smaller than it.
How it works
The pool keeps the product of its two reserves constant. When one token's outside price rises, arbitrage traders buy it from the pool until the pool's price matches, leaving the pool, and you, with less of the risen token and more of the other. The documented formula for the loss against holding is 2 × √r ÷ (1 + r) − 1, where r is the change in the price ratio: about 0.6% at 1.25x, 5.7% at 2x, 13.4% at 3x and 25.5% at 5x, and the same for a fall by the same ratio. Trading fees, 0.3% of volume in that design, can offset it.
An example
Say you deposit tokens worth 1,000 in total, half in each, and token A's price doubles while B stays flat. Simply holding would now be worth 1,500. Your pool share is worth about 1,414, roughly 5.7% less, before counting the fees you earned.
Source: Uniswap docs: Understanding returns (v2) · checked 4 October 2026
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Educational content, not financial advice. Written by hand and checked against the source named above. Something wrong? Tell us and we reply within two business days.